Yahoo Finance This energy giant is managing a difficult balancing act well – it could spell good news ahead
Many investors will subscribe to the concept of shareholder primacy, and that the efforts of a company’s management and staff should be geared to creating the maximum value for shareholders, as they are the ultimate owners of the business.
Yet there is surely a wider picture. There can be little point in driving profits or dividends so hard that the wrath of the regulator, the public (in all likelihood customers) and grandstanding politicians falls upon it, to the possible long-term detriment of its reputation, ability to generate profits or even its licence to operate.
SSE seems to be managing this difficult balancing act rather well, as evidenced by how its shares are trading at near all-time highs, and last week’s full-year results and enhanced five-year plan out to 2027 suggest that there could be further good news for shareholders, stakeholders and customers along the way.
Utilities, even ones whose focus is renewable energy, are conscious of accusations of profiteering in these inflation-stricken times. SSE was careful to flag its record capital investment budget, the acceleration of its drive to net zero and a dividend cut to 60p a share from 96.7p for the coming fiscal year when it revealed a healthy jump in underlying profits for the 12 months to March 2023.
The FTSE 100 company is supplementing cash flow with the proceeds from the sale of 25pc in its SSEN Transmission business and the lower dividend to fund its five-year, £18bn capital investment drive which forms the core of its enhanced Net Zero Acceleration Programme and underpins goals to grow earnings at a double-digit rate each year out to 2027.
SSE spent 42pc of its CapEx budget on regulated networks, 39pc on renewables and just 7pc on thermal power in fiscal 2022. Going forward renewables will get a 40pc share of the budget, as projects such as offshore wind projects Dogger Bank and Seagreen are advanced.
The dividend cut had been well flagged by chief executive Alistair Phillips-Davies and investors have taken it in their stride, perhaps encouraged by SSE’s target to grow the shareholder distribution by 5pc to 10pc a year from fiscal 2025 onwards.
It also looks prudent given how cash flow was not the strongest last year, thanks to a jump in the capital investment budget and also a £1bn rise in trade receivables, which could be evidence of the utility cutting its customers some slack on their bills.
In the near-term, capital investment in the asset base is its focus, as it seeks to play its part in the UK’s long-term energy security needs and drive to net zero by 2050. It is increasing its CapEx budget, under the terms of its net zero strategy. It now intends to spend £18bn in aggregate by March 2027, rather than £12.5bn by March 2025.
The capital investment project will grow the asset base, as it may select acquisitions, and that in turn is expected to drive compound adjusted earnings per share (EPS) of 13pc to 16pc over the next five years. This is a more aggressive target than management’s first iteration of net zero, which had set out its stall to generate compound annual growth in adjusted EPS of 7pc to 10pc a year. That in turn could help SSE to meet its ambition of growing the rebased dividend.
Questor says: hold
Ticker: SSE
Share price at close: £18.34